Ex-US developed markets equities are finally showing signs of perking up, but some investors may be skittish about embracing that asset class. The FlexShares International Quality Dividend Defensive Index Fund (NYSEArca: IQDE) is an ETF that can allay those fears.
Up more than 8% this year, IQDE has recently come alive, jumping almost 6% over the past month. Plus, the FlexShares fund yields a tempting 5.24%. In a year when U.S. equities have outperformed many marquee global markets, investors looking for global exposure want to consider a conservative, defensive approach and IQDE aims to help with that objective
Ex-U.S. developed market dividend payers often feature larger yields than their U.S. counterparts, an assertion proven by comparing large- and mega-cap dividend stocks from familiar dividend sectors such as consumer staples, energy, financial services, and telecommunications.
The quality dividend ETFs specifically screen for management efficiency, profitability and cash flow. Each company has to show management efficiency, or firms that efficiently deploy capital and make smart financing decisions. Companies with wider profit margins are better positions to grow and maintain dividends than those with slimmer margins. Additionally, firms that can meet debt obligations and day-to-day liquidity needs are better capable of maintaining dividends.
The Quality Factor
The quality factor is based on profitability, efficiency, earnings quality and limited leverage, which have historically been a good way to separate good companies from weaker ones.
Importantly, it features significant exposure to ex-US developed markets with ample room for dividend growth. For example, Japan, a market that only recently been boosting payouts, accounts for over 14% of IQDE’s weight.
Additionally, IQDE has some exposure to steady dividend destinations in the emerging world as China, Taiwan and Russia combine for almost 14% of the fund’s weight. The fund also features significant European exposure, a meaningful trait at a time when stocks there are starting to rebound but remain attractively valued relative to the S&P 500.
Europe’s equities also look more attractive, with valuations of European and U.S. equities exhibiting their widest divergence since the end of 2016 on certain measures. According to FactSet data, the Stoxx Europe 600 was trading at 14 times forecast earnings, compared to the S&P 500’s 17 times, which represents a wider gap than its long-term average over the past decade.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.